hw0799

Spanishesk Wrote:
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> Ok heres a question i ws thinking about when doing
> some work in excel...
>
> The variance of a 2 asset port = (Wa^2)(Var a) +
> (Wb^2)(Var b) + 2(Wa)(Wb)(Std a)(Std b)(Correl
> (a,b))
>
> My question is this...lets say the correlation is
> -1. Wouldnt it be possible to get a variance of
> the portfolio that is negative? What would that
> mean? or am i thinking a bout this wrong?

Yes. If the third part of the equation is negative enough to make the summation negative, variance become negative and standard deviation become meaning less as there is no square root for negatives.

However, it is a mathematical truth that third part of the equation can't make the summation negative. The most it can do is making the variance zero (I don't know how to prove it, but know as a fact).